Strong dollar and RBA decision weigh on Aussie

The Japanese yen held its ground amid substantial dollar strength with a loss of fractional loss of just 0.09% against the greenback. The USD/JPY pair has remained well anchored after the Japanese Finance Ministry intervened in FX markets on Sunday to stem the rise of the yen. Price action is likely to continue to hold its current range ahead of significant event risk later this week with the FOMC and ECB rate decisions on tap. Price action continues to hold between the 38.2% and 23.6% Fibonacci retracements taken from the intervention run-up at the 78-figure and 78.55 respectively. It’s likely that at some point traders will once again test the resolve of Japanese officials as they attempt to fade this recent rally with a break below interim support eyeing subsequent floors at 77.70, the 50% extension at 77.50 and 77.25. A breach of topside resistance eyes targets at the 79-figure and yesterday’s highs at 79.50.

Key Levels/Indicators

Level/Indicator

Level

100-Day SMA

77.78

50-Day SMA

76.74

20-Day SMA

76.60

2011 JPY High

75.60

The Australian dollar is the worst performer an hour into US trade with a loss of 2% against a stronger greenback. Risk aversion is in full swing after Greek Prime Minister Papandreou called a referendum on the newly created EU rescue plan to the dismay of European officials, sparking concerns that the leader lacks the support needed to pass such a vote. As the world waits, the implications for the euro and the stability of financial markets are profound, with a failure to pass the needed measures likely to further weigh on global markets.

Accordingly, higher yielding ‘risk’ currencies have gone on the defensive, with the aussie taking the brunt of the losses early in overnight trade. Last night the Reserve Bank of Australia decided to cut interest rates for the first time since the financial crisis by 25 basis points to 4.50% with the central bank citing benign inflation and concerns over the health of the global economy as Europe’s debt crisis looms. Although the cut was widely expected, the move further weighed on sentiment as risk appetite took al dramatic turn lower. The AUD/USD pair now rests just above interim support at 1.0280 with subsequent floors seen at the 38.2% Fibonacci extension taken from the September 1st and October 27th crests at 1.0225, and 1.0195. Note that there will likely be a pullback of some magnitude before continuing lower after such a substantial sell-off. We continue to favor selling into resistance as risk aversion flows persist. Overnight traders will be eyeing data out of Australia with HIA new home sales and building approvals expected to show further weakness in the housing sector for the continent nation.

Key Levels/Indicators

Level/Indicator

Level

100-Day SMA

1.0433

50-Day SMA

1.0239

20-Day SMA

1.0230

2011 AUD High

1.1079

Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail:mboutros@fxcm.com.